Covered Calls On Research In Motion Stock? – Perhaps Not

A lot of investors seem to be getting excited about RIM Stock Again. Research In Motion Stock is being talked about on CNBC, BNN, Wall Street Journal, Globe and Mail, Financial Post and dozens of blogs and websites. Is it really time to buy Research In Motion Stock again? With the new BlackBerry 10 operating system due to make its appearance on January 30, analysts are talking a storm. Many who have seen BB10 love the keyboard while others say it is too late to make an impact.

I have read three or four reports discussing how the best way to handle Research In Motion Stock, is with covered calls. Personally I don’t see the thrill of buying Research In Motion Stock again and going for covered calls to make or break the trade.

On November 21 Research In Motion Stock crossed the 200 day moving average. On December 28 the stock crossed the 50 week moving average. The trend does seem to be up but can investors trust Research In Motion Stock to move a lot higher and how much capital are investors willing to risk.

Research In Motion Stock Chart for 2012 on the TSX

The chart below is from the Toronto Stock Exchange where RIM Stock trades. On the NASDAQ Research In Motion Stock symbol is RIMM. Believe it or not support in Research In Motion Stock is down at $7.50. That’s 36% lower than where it traded on Jan 4 2013! Yes, 36% lower.

Research In Motion Stock Support

Charting Support In Research In Motion Stock

Covered Calls On Research In Motion Stock

Can covered calls can protect an investor in Research In Motion Stock. In the money covered calls provide the best support and the March 2013 $10 call strike can be sold for $2.63 which provides about 22% support. If the stock collapsed from $11.85, Friday’s close, an investor would be protected to $9.00. That seems like fairly good support but the return is only .78 cents or 6.5% for 3 months. I don’t know if I would want to risk my capital for 6.5% in a stock like Research In Motion Stock.

The February $11 covered calls could be sold for $1.72 which provides protection to $10.13. But if exercised at $11.00 in February, an investor would make just .87 cents or 7.3% for two months. Again is 3.65% a month for two months worth the risk and just how much capital would you be willing to risk in the trade?

Is The Risk Worth Capping Your Earnings For

As soon as the covered calls are sold the upside is limited in the trade unless an investor wants to buy back the covered calls and try to roll higher, but often that means rolling out further in time and up higher. This means an investor has place his capital at risk for a longer period of time in Research In Motion Stock.

A Strangle Options Trade For Research In Motion Stock

Perhaps the better strategy is a strangle options trade where the investor buys a call and a put at different strikes but in the same month. For example, if an investor was bullish on the release of BB10, on Friday with Research In Motion Stock trading around $11.80, an investor could have bought the March $13 call for $1.22 and the March 10 put for .83 cents.

Strangle Into Spreads on Research In Motion Stock

To help defray the cost he could turn them both into spreads. He could sell the March $16 call for .51 cents and the March $8 put for .27 cents. This would reduce his cost on the call side to .71 cents and on the put side to just .56 cents. This makes more sense in my opinion. The volumes on the NASDAQ for Research In Motion Stock were large enough to make me think that I am not alone in considering that options strategies is probably a better way to trade the upcoming release of BB10. That said, I think there are better options strategies for Research In Motion Stock later this month than covered calls.